The Check­list

DAVID S. ROSE, EN­TRE­PRE­NEUR, IN­VESTOR, men­tor, and au­thor of The Startup Check­list: 25 Steps to a Scal­able, High-Growth Busi­ness, has been present at the birth of busi­nesses for decades. He knows what makes them grow—or not. Rose shares the simple, practi

Inc. (USA) - - CONTENTS -

David S. Rose ex­plains what you need to do now to save lots of money later

Decide if you want to be a small, in­de­pen­dent busi­ness or a high-growth startup.

This is a bi­nary, crit­i­cal, fun­da­men­tal de­ci­sion that will im­me­di­ately an­swer over a dozen other ques­tions. It will de­ter­mine what type of cor­po­rate struc­ture you use, which state you regis­ter in, what kind of fi­nanc­ing you will be able to re­ceive, how you will com­pen­sate your em­ploy­ees, and much more. A good test is to ask your­self, “Will I try to raise money from out­side in­vestors?” and “Do I plan to of­fer stock op­tions to any of my em­ploy­ees?” If the an­swer to ei­ther is yes, you have no choice but to head down the more com­pli­cated, high-growth path. Switch­ing from one to the other later is pos­si­ble, but that can be very ex­pen­sive.

Fig­ure out who The En­tre­pre­neur is in the com­pany.

It’s tempt­ing to say that “any­one can be a founder,” and “all founders on the team are equal,” but in the real world, that’s just not true. While ex­pe­ri­ence has shown that found­ing teams of two peo­ple (what se­rial founder and ven­ture cap­i­tal­ist Paul Gra­ham de­scribes as “a hus­tler and a hacker”) tend to be more sta­ble and suc­cess­ful, in ev­ery case one per­son is the pri­mary driver. This is the per­son who is pre­pared to do any­thing for the busi­ness, give up work-life bal­ance, and be the one whom in­vestors, em­ploy­ees, and part­ners look to. The buck has to stop some­where, and if you don’t fig­ure that out be­fore you start, you are in for a world of hurt.

If you have more than one founder,

all of them must have vest­ing sched­ules for their eq­uity.

While it is tempt­ing to as­sume that “vest­ing is for ev­ery­one else,” I have seen far too many star­tups crash and burn when one founder leaves a com­pany— along with half of that com­pany’s eq­uity. Vest­ing pro­tects ev­ery­one, in­clud­ing a startup’s founders, so be sure that ev­ery em­ployee’s op­tions vest, and ev­ery founder’s stock re­ver­se­vests from the very be­gin­ning. (Re­verse vest­ing gives the com­pany the right, de­creas­ing over time, to buy back a founder’s stock.) Try­ing to fix this one down the road will be very costly— and pos­si­bly a com­pany killer. A penny saved on pro­fes­sional ad­vice to­day is $100,000 lost in cleanup ex­penses down the road. While there are plenty of books and in­ter­net post­ings claim­ing that you can in­cor­po­rate your­self and down­load forms from the web, you can’t! Or, at least, you shouldn’t. Ev­ery sin­gle se­rial en­tre­pre­neur with whom I have spo­ken has told me, “If only I hadn’t tried to do it my­self, I would’ve saved $100,000!” There’s a rea­son lawyers and ac­coun­tants go to school for this stuff. While start­ing a com­pany might not be quite as dif­fi­cult as brain surgery, I guar­an­tee if you try to do it all on your own, you will screw it up—and then pay 10 times as much to get a pro­fes­sional in to clean it up.

Don’t start by rais­ing money.

Al­though it may come as a sur­prise to a lot of am­bi­tious en­trepreneurs, in­vestors do not fund ideas, no mat­ter how good or how potentially prof­itable they are. A typ­i­cal an­gel in­vestor looks at 40 op­por­tu­ni­ties for ev­ery investment made; a typ­i­cal VC looks at 400. And the in­vest­ments they make will be in com­pa­nies, not ideas. Spend­ing months try­ing to raise funds for an idea is fruit­less and dispir­it­ing. Do not even think about rais­ing money from out­side in­vestors un­til you have de­vel­oped your prod­uct and have at least a hand­ful of pi­lot or beta cus­tomers. Oth­er­wise, it’s like try­ing to teach a pig to sing: All it does is waste your time and an­noy the pig.

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